Cost and Innovation cross swords in the Silicones Market: buyers to benefit

In collaboration with Anjani Menon, Senior Research Analyst – Specialty Chemicals.

Silicones are a type of polymers that have a wide variety of uses ranging from automobiles to coatings in non-stick cookware. Revenue generated by silicone sales comprise significant proportions of total company revenue accounting for 28 percent on average, indicating the importance of this polymer to several major companies, according to a report by CES Silicones Europe.

The global market size of silicones was $16 billion in 2016, and is estimated to reach $20 billion by 2021 with a CAGR of about 5 percent, according to Beroe forecast.

The market is traditionally dominated by Dow Corning, Wacker, Momentive and Bluestar Silicones. They have production plants in U.S., Europe as well as China. 

Lately, silicones production landscape is changing -- Asia in general and China in particular are consuming more of this polymer when compared to the West.

                (in MT)

Parameters	2014	2015	2016
Global Capacity	2.4	2.6	2.7
Global Demand	1.84	1.92	2
China Capacity	0.84	1.04	1.2
China Production	0.67	0.83	0.97
China demand	0.74	0.86	1.1

The above numbers show that silicone production increase in China is happening at a time when the market is already oversupplied, which is completely counter intuitive. Why would Chinese producers ramp up capacity at a time of global surplus? The answer: Higher margins. Chinese producers are moving towards production of complex, high-end specialty chemicals because they offer higher margins as compared to simple chemicals and solvents.

As a consequence of local capacity build up, there has been a 45 percent increase in silicone capacity between 2014 and 2016, which has led to a 60 percent fall in imports of silicones in China.

                (in MT)

	2014	2015	2016
Silicone imports to China	100854	97992	36019

Source: UNComtrade

Chinese suppliers are moving up the value chain in the silicones space, which could potentially threaten the dominance of global players who are currently dominating the market. This trend could have wide implications ranging from cost to product innovation.

Industry experts agree on two key factors:
 

• China will flood the market with silicones
• Chinese producers have a cost advantage

However, questions loom around two critical factors:
 

• Quality perception
• Innovation
   

Quality Perception

“Manufacturing has made a large shift to both China and India.  From my experience, the materials from China are mostly inferior in quality to that of major producers. I still have many friends in China that still don't trust the quality of the local supply and still rely on the major silicone suppliers for their needs,” according to Michael Head, who had earlier worked with major chemical companies.

Paulo Moretti, an industry expert, agreed that Asia presents the highest demand for Silicone. However, he countered that not all of the capacity addition was exclusively because of Chinese producers.

“The data shows the sum of Producers and Formulators of silicone, which may inflate the result. We need to remember that the three biggest producers in the world, Dow Corning, Wacker and Momentive, have their plants in Asia,” Moretti said.

He also added that main competition happens not in silicones per se but a bit down the value chain i.e, at the stage of formulators, who make the blend. Intermdiate formulators are the ones who buy different types of silicones and formulate or blend them according to various downstream applications. For eg: silicone rubber is molded or drawn into sheets for use in cookware/bakeware or extruded into sealants which are used in construction and automobiles. In the case of personal care silicones, formulators blend silicone fluids with cosmetic formulations.

Innovation

With the rise of Chinese silicones suppliers, global players will move towards a different pricing strategy for the Chinese and other key Asian markets to retain market share. However, experts say that the market leaders are themselves aware that playing the pricing game is only a short-term fix.

The only way for global players to beat out new Chinese competition is through innovation. In fact, silicones industry is no stranger to innovation: Global research and development (R&D) related to silicone product lines amounted to 419 million euros, or about 4 percent of revenue. This is almost double the average R&D investment as a proportion of GDP amongst OECD countries, according to a report by CES Silicones.

Experts feel that the Chinese players could lose out to the industry giants on this front.

“I have never seen any new silicone technology presented by any Chinese silicone company to date. I just don't see them as an innovative country in any technology,” Michael Head said.

The current market leaders are indeed continuing to make investments in silicones R&D:
 

• Dow planned to invest in a new innovation center in Midland, Michigan which will focus on silicone innovation in the Home & Personal care products, Construction, Automotive and Renewable energy.
   
• Elkem and Bluestar Silicones formally integrated into one company in 2015 to become fully integrated silicones producer across the value chain. Elkem manufactures the feedstock silicon metal while Bluestar manufactures silicones.
   
• Shin-Etsu is planning to invest 5 billion yen in a new research building at Gunma Complex, Japan which was scheduled to be completed and become fully operational by mid-2016. It is also planning to invest another 12 billion yen at the Gunma complex to produce different kinds of silicone products in small quantities and strengthen its R&D capabilities. It is expected to come online by March 2017.
   
• Wacker is planning to establish a new R&D center at Ann Arbor, Michigan, USA. This facility is expected to be fully operational in the first half of 2017. Innovations will include silicones for health and medical care applications, solutions for paints & coatings, silicone based softeners and personal care products.

It’s quite clear that the global players are powering ahead on the R&D front to counter new Chinese competition. The local Chinese players may have the cost advantage but they are still struggling to compete on the quality front with the global giants.

To be sure, most silicone buyers in China still prefer buying from the global players.  China is known to have cutting edge technology and when push comes to the shove they can potentially match the innovations of global players. However, innovation, per se, is a slow-burn process. The perception among the industry participants is that Chinese players will not be the first to come up with an innovative idea in the silicones space -- at least not yet.

What does it all mean for purchasing managers of various end use products that use silicones? Good news awaits them because due to growing competition they may not only benefit on the price front but also may enjoy the fruits of innovation.

As Chinese suppliers grow in scale, we may see downward trend in the prices of silicones -- at least in the short-to-medium term.  However, in the long run, we are likely to see more innovations and buyers can experiment with novel silicone end uses.